A Slow Fix for GM's Biggest Problem

General Motors (NYS: GM) may have brought in a record-breaking profit last year but, like rival Ford (NYS: F) , much of that profit was generated here in the U.S.

That's a challenge for GM, which is a true global company. It sells far more vehicles outside of the U.S. than it does at home. Nowhere has that challenge been greater than in Europe, where the General has lost over $15 billion since 1999.

Many have tried and failed to fix GM's long-troubled European operation. But, at long last, it's starting to look like real progress might be made.

Finally, thinking the long-unthinkable
While Europe's troubled economy isn't helping any of the region's automakers, the key problem is this: GM's European subsidiary, German car maker Adam Opel AG has, like most European automakers, suffered for years from overcapacity. This means that it has more factories than it can profitably use. Closing unprofitable factories is no easy matter anywhere, but it's particularly difficult in Western Europe, where the political pressure to avoid job cuts can be immense.

This has led to a long series of irresistible-force-meets-immovable-object dramas, as several GM attempts to restructure Opel without plant closings have ended with, well, more losses. But an end to that string of frustrations might be in sight: Opel announced this week that it would seek to shutter its factory in Bochum, Germany, after its current product is discontinued at the end of 2016.

In the U.S., such an announcement would be sad for the workers affected, but not a shock. But in Germany, this is a big deal: If Bochum closes, it'll be the first German auto factory to close since World War II, and only the third in all of Europe to close since 2008.

That's huge. But, by itself, it won't be enough to solve Opel's problems.

One step, but more will be needed
Current GM CEO Dan Akerson made it clear last year that he intends to fix GM's European operation once and for all. For Akerson, "fixing" Opel and GM's other European operations (mainly sales channels for Chevrolet and Cadillac), means streamlining them to the point where the unit is at least minimally profitable during deep economic downturns, just as GM and Ford have managed to do with their operations here in the U.S. GM considered selling Opel at one point, but that has since been ruled out for good reasons.

Akerson emphasized his seriousness by dispatching key members of his inner circle to Opel's board last fall, and charging them with the task of fixing Opel. Many creative ideas have been thrown around since, but it has been clear all along that any effective solution for Opel would involve plant closings, with an emphasis on the plural. Past discussions have included suggestions that a plant in the UK could close, as well as one or more in Eastern Europe.

But plans to close Bochum could embolden other troubled Euro automakers, like Renault (OTC: RNSDF) or PSA Peugeot Citroen (OTC: PEUGY). Like Opel, both have seen sharp drops in sales in recent months, as the European recession has deepened, and both would clearly benefit from closing one or more plants. Such closings could help Opel indirectly: If other automakers reduce their production capacity, Opel could have an opportunity to make incremental sales gains that would take the pressure off of its other plants.

The upshot: It's now clear that patience will be required
A more likely reality for GM is that Bochum's closing will be just one of several painful changes needed to bring its European operation to sustainable profitability. For GM shareholders, the grim takeaway is this: For all of Akerson's decisiveness and determination to take swift action, the fact that Bochum won't close for almost five years points to the fact that removing the European thorn from GM's side is going to be a long, slow, challenging process.

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At the time thisarticle was published Fool contributor John Rosevear owns shares of Ford and General Motors. Follow him on Twitter at@jrosevear. The Motley Fool owns shares of Ford.Motley Fool newsletter serviceshave recommended buying shares of Ford and General Motors and have recommended creating a synthetic long position in Ford. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy

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